Europe – On the Mend?

In speeches before the European Parliament and the Council of Europe a week ago, the Pope (the first non-European Pope) struck a chord among many when he spoke of feelings of angst that have descended on Europe. A sense of decline is what many seem to feel – that the world is no longer Eurocentric, that the future is Asia, Africa and the Americas. The Pope spoke of the negative aspects of secularization and the lack of spirituality. Nevertheless, he was not negative on the prospects for Europe. He criticized what he called the aloofness of the elites and the institutions they have created that are perceived as insensitive to individuals.

He asked for a return to those values of faith, human dignity and fundamental rights that have historically characterized Europe, but which now seem to be waning.

The ghosts of the first half of the 20th Century pervade the thinking of some in Europe today. As well, Europe is experiencing an unwelcome infusion of Islamists and the segregation they bring, and the continuing consequences of the deepest recession since the Great Depression. The ghosts cause one to recall the nationalistic competitiveness in arms, goods and empires that led to the Great War that killed almost 30 million people between 1914 and 1918, of the unrealistic reparations made on Germany that were in part responsible for that country’s hyperinflation in the 1920s, rearmament in the 1930s and their desire for revenge. Those, along with the Depression, were factors leading to the Second World War. The recent increase in Islamists has given rise to xenophobia, while the effect of the slow recovery has provided a sense of unfairness captured by Thomas Piketty.

In emerging from the destruction of World War II, Europe embarked on the idea of a unified Europe, with democracies embedded in social welfare programs, while leaving the cost and burden for defense to NATO, which meant that Europe’s defense became the responsibility of the United States. Social welfare meant reduced work hours and increased benefits, which functioned as long as the numbers of young expanded at a rate greater than the elderly. However, self-centeredness, later marriages, smaller families and better healthcare gave rise to an aging population, with the elderly becoming the fastest growing sector. A shrinking population has meant higher costs on fewer people, which could only be paid for with more debt and/or higher taxes. In turn, that has meant the private economy has become a smaller part of the continent’s GDP, ergo slower economic growth – a noose that gradually cuts off circulation.

But nothing stays the same, including predictions about the future. Europe is Exhibit A. Its political landscape is changing. Austerity measures mandated by the European Union (EU) and the necessity that wealthy countries bailout needy ones and the requirement that needy countries adhere to rules imposed by Brussels are giving rise to anti-establishment political parties that reflect frustration with traditional, conventional ones. In the Netherlands, the Party for Freedom (Geert Wilder’s Party that opposes bailing out its promiscuous neighbors) is now that Country’s largest party. In Spain, Podemos (a Left-leaning party, established earlier this year) is currently the largest party in the country. Podemos wants Spain to continue receiving subsidies, but they “oppose the dominating EU politics…” The United Kingdom Independence Party (UKIP) opposes EU membership, and it is gaining strength. The Front National Party of Marine Le Pen, another anti-EU party became France’s largest party after last May’s elections. Alternative for Germany (AfD) was established last year to oppose eurozone bailouts. According to one report, the AfD “is shaking up politics with astonishing wins in recent state elections.” Centrists are losing control of their countries because of policies they have advocated, like statism, elitism and multiculturalism. The latter may be ideal in theory, but too often is a curse in practice.

However, Europe cannot be ignored. The EU, with about 7% of the world’s population, contributes about 23% of its GDP. The continent’s history is one of enlightenment. Greece was the birthplace of Western civilization; Rome was where Christianity found its first home. Europe was home to the Reformation and the Renaissance. It is a diverse place. There are forty-five countries in Europe and perhaps as many as 230 languages and dialects, twenty-three in the twenty-seven countries that comprise the EU. Because of the proximity of their neighbors, most Europeans speak more than one language, but the singularity in culture, laws and language that have bound Americans together for over two hundred years are absent in Europe.

In spite of that handicap, the concept of a United States of Europe – an idea first mentioned by Winston Churchill in a 1930 speech entitled “A United States of Europe” – remains a goal, albeit illusive. Nationalism was largely responsible for the wars that devastated the continent in the first half of the last century. The progress toward integration is slow and laborious, as it should be, but it is important to not lose sight of that goal. In my opinion, multiculturalism (no matter how well intentioned) has been the most significant cause of today’s schism between nations and cultures; but also responsible has been the attempt to put monetary union ahead of political union.

It is not just political union that must be the goal; it is an emphasis on individual freedom. People should be free to write and speak out, which they are, but also to invest and profit from their ideas. It is the spirit of entrepreneurship embedded in capitalism that would allow the continent to flourish. Dependency on the state destroys the vitality that breeds success and economic growth. When Churchill spoke, he was thinking in terms of federalism, not a supranational government.

Amidst these feelings of Weltschmerz, it was interesting to read Sarah Gordon’s column in last Friday’s Financial Times. She wrote of multinationals flush with cash, and improvements in corporate liquidity among smaller companies. Mario Draghi has introduced quantitative easing. Lower interest rates have eased concerns regarding refinancing. Oil prices are down 40%; the Euro has fallen 10% versus the dollar in the past six months. Falling commodity prices, a lower Euro and low interest rates are a blessing to European manufacturers.

Is Europe on the mend? I don’t know. The future, which is never clear, may well belong to Asia, Africa and the Americas. But the ingredients for repair are there. The evolving political scene could force changes that toss overboard old restrictive regulations and release the youthful vigor that comes with individual freedom and creativity. While no one can foresee the future, it is true that when making predictions we tend to extrapolate our most recent experiences. The news has been mostly of discord and unhappiness; so it is unsurprising that European equity markets reflect those concerns. But we must be careful less we let history exert too much influence on how the future might unfold. It is out of ashes that Phoenixes rise.